Deck 14: Choice of Business Entity, Sole Proprietorships, and Partnerships

Question 1

General partnerships are not created by filing a form with a government agency.

Answer 1

True
Explanation: The partnership is created when the parties agree to act as a partnership or their actions create a partnership by implication.

Question 2

The Revised Uniform Partnership Act was enacted by Congress to make partnership law more consistent and standardized throughout the United States.

Answer 2

False
Explanation: RUPA was drafted by the National Conference of Commissioners on Uniform State Laws.

Question 3

Even if the parties have no intent to form or operate as a partnership, their conduct may result in the law recognizing them as partners.

Answer 3

True
Explanation: A partnership may be implied from the parties conduct even if no intent exists.

Question 4

A _____________ is a business entity that has a proven track record of success and sells the right to operate the business and use the business's trade secrets, trademarks, products, and so on.

Question 5

A business existing in or by right of law is considered a ________ entity.

Question 6

Capitalization refers to how the business will fund its operations.

Question 7

Limited partnerships are required to file a(an) ________ return with the IRS each year.

Question 8

Wayne Lewis wants to start a sole proprietorship named Lewis Plumbing Services. Because it will be a sole proprietorship, Wayne has no filing requirements other than obtaining the appropriate business license from the local and state government where the business will be located.

Question 9

Business entities are sometimes referred to as business _______.

Question 10

A general partner who rightfully dissociates from a partnership remains liable for predissociation debts of the partnership.

Question 11

Tabletop, LP, is registered in Nebraska but operates the business in the state of Iowa. Nebraska will require that an in-state address and a ________ be identified to receive mail and accept legal documents.

Question 12

In all forms of business entities, the entity itself pays taxes on money earned by or through the entity.

Question 13

Business owners are also known as _______.

Question 14

One disadvantage of a sole proprietorship business entity is that it is restricted to the principal and the principal's immediate family in terms of number of employees who may work for the business.

Question 15

If two people identify themselves as general partners and create a written partnership agreement, the law is obligated to recognize their business entity as a general partnership.

Question 16

General partnerships are pass-through entities regarding taxation; however, limited partnerships are not pass-through entities for taxes.

Question 17

The duty of a partner to act in the best interests of the partnership is called a ________ duty.

Question 18

Federal laws regulating the selling of equity in limited partnerships through broker-dealer contracts are known as ________ laws.

Question 19

Under the Revised Uniform Partnership Act, the act of leaving a partnership and ceasing to be a principal is called _______.

Question 20

Under the Revised Uniform Limited Partnership Act, the act of leaving a limited partnership and ceasing to be a principal is called _______.

Question 21

Family limited partnerships are designed solely for estate planning and asset distribution for wealthy families.

Question 22

Under the Revised Uniform Limited Partnership Act, limited partners may act as consultants and may contribute their expertise to the limited partnership.

Question 23

A limited partnership is required to have two or more limited partners.

Question 24

Mike is a limited partner in Big Blue, LP. The partnership agreement permits him to have a say in the removal of general partners and the blocking of new partners. This agreement will jeopardize his limited partner status.

Question 25

A limited partnership is formed by the limited partner's filing of a certificate of limited partnership with the appropriate state government authority.

Question 26

Family limited partnerships are designed for parents and children to operate a business together while protecting family-related assets.

Question 27

An advantage of operating as a sole proprietorship is that personal liability for any business losses is limited to the owner's investment in the business.

Question 28

In the absence of an agreement to the contrary, the Revised Uniform Partnership Act mandates that general partnership profits be split equally among the partners.

Question 29

To date, every state in the union has adopted the Revised Uniform Partnership Act except the state of Louisiana.

Question 30

With regard to dissociation and dissolution, the Revised Uniform Partnership Act adopted and reserved the same general rules and procedures as its predecessor, the Uniform Partnership Act.

Question 31

Franchises are regulated by a franchise agreement.

Question 32

The Revised Uniform Limited Partnership Act requires that there be a written partnership agreement regarding limited partnerships.

Question 33

Robert and Philip are operating a general partnership. Under the Revised Uniform Partnership Act, if Robert rightfully or wrongfully dissociates from the partnership, the partnership continues to exist.

Question 34

A sole proprietorship automatically is dissolved when the owner dies.

Question 35

In United States v. Morton, Morton was declared a general partner despite all paperwork, including tax returns, naming her as a limited partner because of her conduct.

Question 36

One disadvantage of a sole proprietorship business entity is that it is restricted to a single location and cannot expand.

Question 37

If a limited partner actively participates in day-to-day management of the business, he or she may forfeit limited partner status and lose limited liability for debts and liabilities.

Question 38

Sole proprietorships may sell equity in the company in order to raise funds.

Question 39

If a sole proprietorship loses money, the principal may deduct the losses from her or his own personal tax liability, if any.

Question 40

If someone successfully sues a sole proprietorship, he or she must exhaust the businesses assets before going after the principal's personal assets.

Question 41

A limited partnership requires:

A) at least two general partners.
B) at least two limited partners.
C) a written limited partnership agreement.
D) at least one general and one limited partner.

Question 42

In a general partnership:

A) profits and losses must be split equally among the partners.
B) an unequal split of profits may be agreed to based on the partnership agreement, but losses must be split equally.
C) profits must be split equally, but losses may be split unequally based on the partnership agreement.
D) profits and losses may be unequally split based on the partnership agreement.

Question 43

Dissolving a limited partnership requires:

A) a unanimous vote among all partners.
B) a unanimous vote of the general partners and a majority vote of the limited partners.
C) a unanimous vote of the general partners and consent of any limited partner who owns a majority of the rights to receive a distribution as a limited partner.
D) a unanimous vote of the limited partners and consent of any general partner who owns a majority of the rights to receive a distribution as a general partner.

Question 44

Which of the following is not an option available to a general partnership seeking capitalization?

A) borrowing money from one or more of the partners
B) selling the right to a percentage of the profits to an investor
C) selling ownership rights through the public markets
D) borrowing money from a commercial lender

Question 45

The Revised Uniform Partnership Act mandates that with regard to partnership debts and liabilities, general partners are:

A) not personally liable for non debt liabilities, which may be charged only to the partnership, but personally liable for debts.
B) personally jointly liable for unpaid debts and liabilities.
C) personally jointly and severally liable for unpaid debts and liabilities.
D) not personally liable for debts or liabilities, which may be charged only to the partnership.

Question 46

Jonathan has graduated and wants to start a business. Which business entity gives him the most complete and exclusive control over the business and any business decisions?

A) sole proprietorship
B) limited liability company
C) corporation
D) general partnership

Question 47

Stan and Frank have started a general partnership. Stan has contributed 95 percent of the start-up capital and has the business experience and contacts, while Frank's primary contribution is the labor necessary to operate the business. Management decisions are jointly made. At the end of the year, the business has shown a $100,000 profit. Stan and Frank have no formal written partnership agreement.

A) Stan is entitled to $95,000, and Frank gets $5,000.
B) The RUPA mandates that each get $50,000.
C) The RUPA mandates that Frank be paid a fair amount for his labor contribution and the remaining profits be split with 95 percent going to Stan and 5 percent going to Frank.
D) The RUPA mandates that Frank be paid a fair amount for his labor contribution and the remaining profits be split equally between Stan and Frank.

Question 48

A partnership is considered fully terminated:

A) after dissociation.
B) after winding up.
C) after dissolution.
D) after the termination certificate is properly filed.

Question 49

With regard to taxation of partnerships:

A) a partnership files a federal and state partnership tax return and pays taxes on its income.
B) a partnership must file an information return.
C) a partnership files a state partnership tax return and pays taxes on its income but no federal filing is required.
D) partnerships have no tax-filing responsibilities.

Question 50

Lisa and Tara are operating a business as a general partnership without an express partnership agreement. Should a dispute arise, the courts will look to ________ to resolve the issue regarding operation of the partnership.

A) common law
B) state contract law
C) the Revised Uniform Partnership Act
D) federal contract law

Question 51

Steve has opened a sole proprietorship bicycle shop. The business shows a net income of $100,000. Steve took a salary of $40,000. The remaining money is left in the bank.

A) At tax time, the business pays taxes on $100,000, and Steve pays taxes on $40,000.
B) At tax time, the business pays taxes on $140,000.
C) At tax time, Steve pays taxes on $140,000.
D) At tax time, the business pays taxes on $70,000, and Steve pays taxes on $70,000.

Question 52

Which of the following require(s) a formal filing to be recognized as a valid business entity?

A) a sole proprietorship
B) a general partnership
C) a limited partnership
D) all business entities

Question 53

Bob, Carol, and Ted have decided to go into business as a limited partnership importing and selling exotic spices. Bob and Carol will manage the business, and Ted will have no role in the day-to-day operations. Bob and Carol have each invested $500,000, and Ted has contributed the building and land that the business will be operated from. Alice, a customer, contracts a rare disease from a contaminated spice sold by the company and sues. Alice is awarded a judgment for $5 million. After she exhausts the assets of the partnership, having the property and building sold and seizing all other property, $3 million remains unpaid.

A) Bob, Carol, and Ted each owe $1 million, and Alice must sue each for his or her part.
B) Bob, Carol, and Ted each owe $3 million jointly and severally, so Alice may sue one, two, or all three for the $3 million balance.
C) Bob and Carol each owe $1.5 million, and Alice must sue each for his or her part; Ted has no additional liability.
D) Bob and Carol each owe $3 million jointly and severally, so Alice may sue one or both of them; Ted has no additional liability.

Question 54

Harry wants to start a personal training business. He should choose a sole proprietorship entity if he seeks:

A) limited liability.
B) perpetual existence for the new company.
C) the ability to raise capital by selling equity in the business.
D) the ability to avoid management conflict.

Question 55

A disadvantage of the sole proprietorship is:

A) the difficulty of formation.
B) the inflexibility of management and control.
C) the unlimited liability of the principal.
D) the double taxation that occurs.

Question 56

Frank and Jesse are operating as a general partnership. A question has arisen that is not covered under their partnership agreement and also not addressed by the Revised Uniform Partnership Act. What will the courts do to resolve the situation?

A) dissolve the partnership and allow them to reform
B) look to foreign partnership laws because the RUPA encompasses all U.S. partnership law
C) look to common law
D) look to the UCC for a gap filler

Question 57

Regarding limited partners:

A) they may withdraw from the partnership at any time but they forfeit their investment if they withdraw early.
B) they may not withdraw before the time that the partners have agreed the partnership will terminate.
C) if the partnership agreement is silent as to notice required prior to termination, 90 days' written notice is required before the limited partner may withdraw.
D) they must obtain a court order to withdraw because of their limited liability and its effect on the remaining partners and third parties dealing with the business.

Question 58

Mike lends money as a business loan to Kathy, who is capitalizing her start-up sole proprietorship named Kathy's Things. If Mike must sue for repayment, he would sue:

A) Kathy.
B) Kathy's Things.
C) Kathy and Kathy's Things.
D) no one, since the loan makes him a partner.

Question 59

A business that exists in fact, although not formally recognized, is referred to as being:

A) de facto.
B) de jure.
C) de minimus.
D) de legal.

Question 60

Redrock GP has decided to go out of business. Selling the partnership assets and making payments to creditors will occur during the ________ phase of the closing of a partnership.

A) dissolution
B) dissociation
C) winding-up
D) termination

Question 61

Which of the following does not require the filing of a form with a government agency to come into existence?

A) a general partnership
B) a limited liability company
C) a corporation
D) a limited partnership

Question 62

What process will the courts use to resolve a dispute between principals of a limited partnership in the absence of a written partnership agreement?

Question 63

Describe the common terms of a franchise agreement that govern the relationship between franchisee and franchisor.

Question 64

Chris and Paul operate a business in which both have contributed $50,000 to the business's capitalization. Chris makes all business decisions, and Paul made Chris sign a partnership agreement saying that Paul is liable only for partnership debts up to $50,000.

A) Both are general partners.
B) Chris is a general partner, and Paul is a limited partner.
C) Paul is a general partner, and Chris is a limited partner.
D) Both are limited partners.

Question 65

A general partnership may be formed by:

A) oral agreement.
B) written agreement.
C) either oral or written agreement.
D) oral, written, or implied agreement.

Question 66

Name and discuss the fiduciary duties owed by general partners to the partnership as set out in the Revised Uniform Partnership Act.

Question 67

Which of the following does not require two or more principals?

A) limited partnerships
B) limited liability partnerships
C) sole proprietorships
D) limited liability companies

Question 68

Charlie and Mia have started selling T-shirts with iron-on decals and lettering. They have no formal written agreement and simply decided to split all profits equally. Each has contributed $1,000 to the enterprise, and since Mia will be doing all of the work, Charlie agrees that he will be responsible for 75 percent of any losses. Charlie does call in to make day-to-day decisions, but Mia purchases the shirts, decals, and lettering, operates the press, and runs the store. Charlie stays home and smokes cigars and drinks scotch. Alan purchases one of their shirts and, after wearing it all day, discovers that the dye has run and his upper body is now blue. After bathing numerous times, he finds that the blue dye will not wash off. Alan sues and is awarded $100,000 in damages. Charlie claims that there was no real business entity formed and that he should not be liable. How will the court decide?

Question 69

You have been invited to become a member of a partnership. What are some of the considerations you need to assess in making a decision to become a general or limited partner?

Question 70

Bud and Lou own and operate a bakery. They each perform all of the functions in the bakery, from baking to cleaning up. They make decisions jointly and hold themselves out to the public as business equals. When starting the business, Bud contributed $60,000 and Lou $40,000 to capitalize the business. They have a written agreement stating that they will share profits equally; however, responsibility for losses will be allocated at 60 percent to Lou and 40 percent to Bud. If Helen slips and falls in the shop and gets a judgment for $100,000, how may Helen proceed?

Question 71

You have just graduated and you want to start your own business. You have a degree in horticulture, so you have chosen to open a florist shop and plant nursery. What type of business entity will you choose? Explain its benefits and detriments in detail.

Question 72

A franchise should be thought of as:

A) a type of business entity.
B) a federally regulated business entity.
C) a contractually based business entity.
D) a method of conducting business.

Question 73

Which of the following does not require a duty of care or good faith to other principals?

A) a sole proprietorship
B) a general partnership
C) a limited partnership
D) a family limited partnership

Question 74

Principals generally have no personal liability for the business entity's debts regarding:

A) limited partnerships.
B) limited liability partnerships.
C) corporations.
D) limited liability companies.

Question 75

How is the Revised Uniform Partnership Act similar to the Uniform Commercial Code in terms of gap filling?

Question 76

Sam and Dave are going to open a sporting goods store. They sign a written limited partnership agreement naming Dave as a limited partner and Sam as the general partner. Sam files a certificate of limited partnership with the state. Sam contributes $100,000 toward the start-up, while Dave contributes $200,000. They agree to split profits evenly because Sam will be working in the store and operating the day-to-day business. About a month after they open, the business is not doing well, so Dave starts becoming more involved. Soon he is requiring that Sam approve all purchases with him, and Dave is actively directing Jack, the sole other employee. One day, Geoff, a customer, is injured when a bowling ball falls off a shelf and shatters his foot. Geoff sues and is awarded a judgment of $1 million.

A) As this was a limited partnership, Sam is liable for $800,000 and Dave is liable for $200,000.
B) Sam and Dave are each liable for up to $500,000.
C) Under the circumstances, Sam and Dave are both jointly and severally liable for the full $1 million.
D) Whoever negligently secured the bowling ball on the shelf is liable for the $1 million liability.

Question 77

Roger is a limited partner in a business. To retain his limited liability protection, he must not:

A) participate in the approval of new partners.
B) participate in the removal of existing partners.
C) consult or be paid by the business.
D) assume management responsibilities.

Question 78

Name the three specific events that are deemed events of dissociation by the Revised Uniform Partnership Act and are considered to be the most common.

Question 79

Bill is a general partner in a four-member limited partnership with two general and two limited partners. The partnership is silent with regard to the duration of the partnership, and Bill wishes to retire.

A) Bill may withdraw at any time, and the partnership continues.
B) Bill must give six months' notice before being permitted to withdraw.
C) The other general partner and the limited partner with the largest liability must agree to his withdrawal.
D) The court must grant permission for Bill to withdraw since the agreement was silent and the other partners and third-party customers of the partnership must be protected.

Question 80

Thelma and Louise are roommates in college. Thelma loves to bake and makes incredibly tasty chocolate chip cookies. Louise suggests that they sell the cookies around campus and split the profits. They orally agree that Louise will advertise the cookies, provide decorative bags to put the cookies in, and be responsible for deliveries around campus while Thelma will obtain the ingredients and do all the baking. They intend the whole endeavor to be low-key and informal. Have Thelma and Louise created a business entity, and why is it important for them to fully understand their relationship?